Simple Ways of Tax Deduction
Most people are tempted to go for the standard deduction when they prepare for their tax returns. But you can save by itemizing provided you own your property or occupy a property in a high-tax area.
It’s a common thing to consider itemized deductions for mortgage interest, property taxes, and charitable donations. But most homeowners overlook a number of ways of saving through deductions.
Here’s an overview of the tax deductions that can save you lots of cash.
Discount Points paid on your home mortgage:
The discount points you pay are tax deductible unlike origination points. The former is deducted under Schedule “A” of your IRS 1040 tax return. If you do not itemize your deductions for other tax-related reasons, you will not be able to deduct the cost of points when filing your tax returns.
Mortgage Refinance fees paid over the loan period:
If you have paid a loan fee while refinancing your mortgage, it can be deducted over the life of the loan such as 15, 20 and 30 years. For each point paid to the lender, the interest rate is lowered by at least 1/8th percent. Since the annual deduction fee for refinanced mortgages is so small, most homeowners forget to keep in mind the tax deductions. They often prefer going for no-cost loans even if the fully deductible interest rate is slightly higher.
Undeducted loan fees from a prior home loan refinance:
If you are refinancing a prior refinanced mortgage, you will be able to deduct any remaining undeducted loan fee in the tax year of the refinance. For instance, if you have $3000 of undeducted loan fees remaining from a prior home mortgage refinance, then the cash amount becomes fully deductible interest as a lump sum in the year of the second refinance.
Prepayment penalty:
If you have sold your home or refinanced your mortgage, and paid prepayment penalty to the previous lender, then that penalty qualifies as itemized tax-deductible interest. Prepayment penalties mostly apply to home loans during the first three to five years depending upon the terms of the loan.
Pro-rated property tax:
You can deduct pro-rated property tax in the year of home sale or purchase. The property taxes should be pro-rated between the buyer and seller depending on the number of days each party owned the home during the property tax year. The best proof of paying your pro-rated property tax share is the statement provided at closing time.
Pro-rated mortgage interest:
Another pro-rated itemized tax deduction, if you buy or sell your property, is the pro-rated mortgage interest for the month of sale. This kind of deduction occurs if the home buyer assumes or purchases “subject to” an existing mortgage. The settlement statement provided at closing is the best thing that proves your pro-rated mortgage interest deduction.
Prepaid property taxes and mortgage interest:You can deduct payments on prepaid property taxes and mortgage interest in the year of the actual payment. This allows you to save extra dollars of itemized interest deductions. For instance, if you have paid your 2006 property taxes and mortgage interest in December 2005, then such payments are tax deductible in the year of actual payment. You can also deduct your January 2006 mortgage payment if you have prepaid it in December and save extra dollars of itemized interest deductions.
Ground rent:
Most homeowners ignore deducting their ground rent when their properties are on leased land. But the lease should have been for 15 years, including renewal periods. The lease is freely assigned to the buyer, the land owner’s interest should be a security interest (similar to mortgage) and there is also the option to buy the land beneath your home. Unless these conditions are fulfilled, your ground rent payments are not tax-deductible as interest.
